Real Estate Investment
Buying a home can help you retire early, if you make 1 important choice
According to author and co-founder of AE Wealth Management David Bach, "buying a home is the escalator to wealth in America." Homeownership can also help you retire early, the self-made millionaire tells CNBC Make It. That is, if you pay your mortgage off.
"I can tell you, having been a financial advisor at Morgan Stanley, my clients who retired at 50 years old, the secret was: They had paid their mortgage off early," says Bach.
Take out a 30-year mortgage, he says, but with the intention of paying it off in 25, 20 or ideally, 15 years. To do so, start by reviewing your last payment, Bach writes in "Smart Couples Finish Rich." "Now take that number and add 10 percent to it. That's how much you're going to send the bank next month, and every month thereafter."
For example, if you were paying $1,000 a month, now you're going to make $1,100 payments every month.
"Inform the bank that you are doing this and that you want the extra $100 a month to be applied to the principal (not the interest)," notes Bach. "If you keep this up, you'll wind up paying off your 30-year mortgage in about 25 years. Increase your monthly payment by 20 percent, and you'll have that mortgage retired in about 22 years."
Even if you don't retire in your 50s, paying off your mortgage early can save you tens or even hundreds of thousands dollars in interest. Here are three other strategies that can help you pay off your mortgage early and save big.
1. Set up a bi-weekly mortgage. That means, "instead of paying your mortgage once a month, you actually set it up with your bank and pay half a mortgage payment every two weeks," says Bach.
So if your mortgage payment is $1,000 a month, you will pay $500 every two weeks. Since you're making payments every other week, rather than once a month, you'll end up making one extra payment a year. By paying half of your monthly payment every two weeks, over the course of a year, you will make 26 half-payments. That's the same as 13 full payments, or one more payment than there are months in a year.
2. Make one extra payment a year. Another option is to simply make more mortgage payments. The next time you get a raise, bonus or any other small financial incentive, direct it towards an extra payment.
3. Switch your 30-year mortgage to a 15-year mortgage. This strategy may not be feasible for everyone, but it can be a huge money-saver.
Say you have a $250,000 mortgage, says Bach. A 30-year mortgage at 4.5 percent means you'll pay about $1,266 a month. If you switch to a 15-year mortgage, at 4.5 percent, you'll owe $1,912 a month. "That's $646 more a month, which is a lot, I know," he says. "It's precisely $21 a day more. BUT you will now pay off your home in 15 years and save $112,000!"
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